Calculate profitability index for proposed vending machine

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Question - The owner of Black Hills Cafe is considering the purchase of a new, semi-automatic coffee-making machine. The machine will cost $75 000 and last 10 years. The machine is expected to have no salvage value at the end of its useful life. The owner estimates that the new machine will generate $12 000 in after-tax savings each year during its life (including the tax effect of depreciation). The depreciation charge is the same for accounting and tax purposes.

Required - Calculate the profitability index for the proposed vending machine, assuming the after-tax required rate of return of:

(a) 10 per cent.

(b) 12 per cent.

(c) 14 per cent.

Reference no: EM132932081

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